GameStop Has a Very Big Problem

Video game retailer GameStop (NYSE: GME) generates a significant portion of its profits from the sale of used games. The company buys these pre-owned games from customers, refurbishes them if necessary, and then sells them at a higher price -- often only $5 or so below the retail price of the new version.

While this has served GameStop well over the past few years, helping the company remain relevant as digital distribution has become more popular, the recent entry into the used-games business by retail giant Wal-Mart Stores (NYSE: WMT) is a big reason for concern. Wal-Mart has begun buying pre-owned games, with a plan to eventually begin selling them in stores. And it's clear from the prices Wal-Mart is paying that GameStop's lush margins on used games are likely a thing of the past.

Source: Wal-Mart.

Disrupting the used-games marketGameStop achieves a gross margin of around 45% by selling used games and hardware. This is GameStop's most profitable segment, and it typically accounts for nearly half of the company's total gross profit. It's a simple business model, buying low and selling high, and it's been extremely successful for the company.

On GameStop's website, trade-in values are listed for a selection of fairly recent games. A game like Titanfall for the Xbox One, for example, fetches $35.10 for a pre-owned version. GameStop then turns around and sells that used copy for $54.99, only $5 less than the price of a new copy and a 57% markup from the trade-in price. This trade-in price includes a 30% promotional bonus, so the typical markup may be even greater.

Wal-Mart lists trade-in prices for all the games it accepts. And it becomes clear after checking a few titles that the retailer has largely delivered on its promise to pay more than anyone else. Of the 10 featured games on GameStop's website for the PlayStation 4 and the Xbox One, Wal-Mart beats GameStop's trade-in value for seven. The average premium that Wal-Mart pays above GameStop's trade-in value for those seven games is a little more than 15%.

Of course, this is a small sample, but remember that GameStop's trade-in values include a promotional 30% bonus. For non-featured games, the Wal-Mart premium may be even higher.

This is certainly bad news for GameStop, as it means that the retailer may need to boost its trade-in values in order to compete, thus reducing its used-game margins. But the second prong of Wal-Mart's attack on the used-game market will begin when the company actually begins selling these used games. Given that GameStop sells its used games at a very small discount to its new games, there's plenty of room for Wal-Mart to undercut GameStop on price.

In fact, of the 10 previously mentioned featured games, Wal-Mart sells the new version of six of these games at a lower price than GameStop sells the used version. I was stunned when I discovered this. And when Wal-Mart begins selling used games, GameStop's prices will look ludicrous in comparison.

Wal-Mart is attacking GameStop's used-game business model at both ends, paying more for used games and selling them for less, and I don't see a way for GameStop to maintain its margins in the face of this newfound competition. That's not to say that GameStop is doomed, but the company's most important cash cow is in serious trouble.

The bottom lineThe used-game market, currently dominated by GameStop, is ripe for disruption, and Wal-Mart has shown that it's serious about upsetting the status quo. The era of outsize used-game margins at GameStop is likely coming to an end, and the result will be a severe hit to the company's profits.

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Take that gamestop, Not only do they Gouge on buying game's from people, But I took my like new Nintendo ds lite and it was in mint condition I took it there seeing how much I could get, And they offered me 5$ really so since I bought it for 199$ from you I dont even get half that back what idiot's to think I'd sell for that low Gouging companys suck.

Gamestop SPECIALIZES in video game/peripheral sales. Best Buy DOESN'T and neither does WALMART.

Gamestop has consumed Electronic Boutique and Software ETC- while putting Funcoland out of business. It is the only store that specializes in game hardware and they are everywhere they need to be to capture hardware sales. The only threat to Gamestop is digital downloads. The hardware will still be their saving grace.

Over be me there's a place called DiscReplay and they do the same thing as Gamestop minus the added bombardment of questions and ramming extra garbage down your throat. DiscReplay not only sells and buys used video games but they also buy and sell vinyls and music cds. (DiscReplay also pays cash for trade-ins and not instore giftcards though they do offer that as an option)

1) If your game is not in working condition or come with its original case the Walmart value is a whopping $0.00. Where as Gamestop does not lower the value if you don't have box and takes off at most $4 off of a game that is defective.

2) The 35.10 you mentioned DOES NOT include the 30% bonus and even a step further, until today it was a guaranteed $40 even going higher with a PowerupRewards Pro membership.

3) As a Gamestop employee I check the prices of trade-ins daily. All but 3 of the games listed, Gamestop actually pays more for then Walmart.

@ xxgamer999 - The DS Lite launched in 2006 and Nintendo has since launched the DSI, DSI XL, 3DS, 3DS XL & 2DS. Games are no longer being made for the DS and with the exception of a small handful. The system itself is obsolete and something that very rarely sells. As far as the price assuming the system is as you say the trade value in credit is $25. For you to be getting offered less must mean you are either missing the Stylus or AC Adapter both of which's replacements come out of the value you would get for the system.

@ bendriver - All Gamestops offer cash as an alternative to credit though at a 20% lesser value. The only thing that could change that is if the state you live in prohibits them from doing so. As far as ramming extra crap, it's retail you get that everywhere you go by any corporation. Mom & Pop stores are probably the only exception to that now of days.

There is the longer-term prospect of games moving away from physical media much like what has happened on music and video.

Games downloaded or played through cloud services online is the future of how to get a game into your home much like it is already on your tablet or smart phone. There is a day where an XBOX and Playstation no longer will have a disc media and Gamestop will go where Blockbuster and others have gone already.

Rather than waiting until too later, they should start to transition towards what is a more sustainable type of business. How about growing a new category of gaming centric TVs, projectors, speakers, chairs/furniture, subwoofers, Kinect compatible exercise gear etc. that can transform your old setup into the ultimate of immersive interactive experience? Something needs to happen and we don't need some sort of Radio Shack selling gaming consoles only...or the door will be closed some day.

Aaawwww.. this article assumes that Walmart is going to continue with this and not drop it again like every other time they have tried this (My local Walmart still has a bunch of games from there last atempt at selling used games where they still think some one is going to pay 8 bucks for the Burger King and junk PS2 games). As much as some hate it, there is a reason that things drop in value fast with games, demand more offten then not drops fast after a game comes out and as much as many think of what a store is selling a game at now, a store has to think about the possablity that it won't sell till after who knows when. It's making sure that this is covered that has keeps Gamestop going and as much as it erks many that it works, it does.

gamestop has nothing to worry about, I asked the local walmart about this trade in program and what I was told is that they take games in on trade and give you credit towards another game ( hang on to the receipt though as that is what they do, NO walmart gift card like is being advertised and they give NO cash. one mor ething is they have no idea what a game is worth trade in wise only 5 were listed on their site as of yesterday and they take take the game out of your visual range to "look it up" and I don't know about you but I sure wouldn't trust walmart not to damage it in some way making it completely worthless for sale trade. my advice is do NOT go to walmart for game trade ins especially when the credit is only good towards brand new games and you can get better deals and use your credit towards used at other places ( course I also try to avoid GS because there is no real savings buying used I mean really only 5 to 10 cheaper for used vs new, give me a freaking break

I just took a Xbox360 to the local GameStop. It included a 120gb hard drive, a controller and the power supply box. The clerk said he could give me $50 something in cash or $60 something for trade-in. Then he said, but I will have to buy a new controller for it first for around $40 because the thumb-pads on the controller I was trading in were a bit worn and then he told me I'd also have to by a HDMI cable to hook it up to a television because I sure in the hell wasn't going sell him the one I bought after the fact for $40 for my own gaming. I asked "So how much will you give me for what I have here?" and he started adding in a new controller and a new composite/HDMI cable and said "Well, I can give you about $10 in-store credit. WTF? I said to the clerks that had gathered around that they should have a rack supplied with K-Y Jelly so they can lube me up before trying to !%!$ me so bad. This drew the attention of the customers that were shopping there and I went on a rant asking how they can justify ripping customers off like this. The only words spoken by the clerks was "Have a nice day sir" and "Goodbye". GameStop has lost a good customer and will lose many more when I start posting this experience everywhere I can. The company is a bunch of crooks! I could go on, but that is enough for now for the public to get a good enough idea what GameStop is all about. Final words "DO NOT GIVE GameStop YOUR BUSINESS!", Support the privately owned game stores that actually appreciate your business. Thanks for listening people and I hope you think before stepping foot inside one of these shops that are simply out to scam you.

I will continue to buy used from Gamestop since they will always have a bigger stock of them, I will continue to trade mine in with Gamestop since they will give at least the same as Walmart and they know what you have, games are worth about 2/3rd when just out and half later and much less down the road...just a fact....quit whinning....that inventory needs to turn and they can't give you top dollar for something 6-9 months old that a lot less want to play or have played already......and finally, I can walk into Gamestop and get waited on....Wallyworld....NO.

One of the biggest scams I believe Gamestop uses is when you do a console trade in, often times the scam is they offer you like $40-$50 for the console, but then tell you you need to have a newer controller with it that cost..........no surprise, the same price they trying to offer to you for the console. They then claim they will not have any used ones in.

They screw customers, no doubt about it. Another scam they use involves getting out of the MSRP rule, if a game becomes in high demand or rare, they will maximize profits by opening new games and sell them as used for significantly more, they do this since it gets them out of the MSRP rule where they have to sell at a set price, but the game is worth more than that itself.

Now if you want to get back at them, start switching hardware, seen some people have those 250GB Hard drive shells in the 360s and replace the drive inside it with a 20 gig or so HD and trade it off as 250GB, I guess it was inside the Xbox, I dunno.

First of all, if you are being offered $40-$50 for a console, then that console is probably old or outdated. And they do not require a controller at all if you are trading in a console because those are separate from the console. Also I know that they never sell a used game copy for more than a new one, so what would be the point of opening a new game?

Finally, please don't be stupid enough to switch hardware. They check all of that stuff when they take a console in, and they will adjust the value accordingly or not even take it because it's modified.

Stop raggin' on GameStop Motley. We get it. You do not like them or their business model.

I, for one, will never and never have, utilized Walmart. And I do mean ever (okay, I've been in one once but ran away in fear and loathing within 30 seconds of entering).

DO NOT PURCHASE YOUR GAMES, GAME SYSTEMS, USED GAMES, PERIPHERIES OR ANY ITEM RELATED TO GAMING AT WALMART.

A wise man once said: "Never buy anything at Walmart with a value of greater than $10. For some reason, all items sold at this major retailer are of lower quality and have a higher failure rate than the same item purchased at a reputable retailer. Perhaps it is in this retailer's business model to require their suppliers to provide only those items that failed QC testing at the manufacturers?"

One thing the article failed to mention, Walmart will take your trade-in and let you use the allowance on ANYTHING in the store, not just games. So if you must, you can sell your game back to Walmart and buy beer, or oil for your car, or a new game. I heard this over the loudspeaker while checking out videos at Walmart, and realized that, if Gamestop were ever a good investment, this ends it. The convenience of finding a Walmart store compared to a Gamestop store, and the ability to trade in the game for ANYTHING, not just games, gives Walmart competitive advantage that Gamestop simply won't be able to overcome.

At Walmart you have to go to customer service to trade your games. Have you ever stood in a customer service line at Walmart? Have you ever delt with those associates? EXACTLY! It's not easy and less than enjoyable.

Game trading is a huge distraction for Walmart and they will be unable to effectively execute...just ask Target and Best Buy. Walmart will abandon game trades by the end of 2014.

I tried Walmarts system of selling them online and was pleasantly surprised at how much I'm getting. For 4 games (Need for Speed MW U, Monster Hunter 3U for 3ds, Super Mario 3D Land, and Gran Turismo 6) I'm getting 54.07$! I checked my local GameStop and would've been ripped off. This is definitely gonna be my new source of selling games.

First of all, as far as system trades go a lot of people need to realized a few things.

As a GameStop employee, trust me, we hate that we have to tell you that you're only getting a few dollars for something we both know you paid way more for. Contrary to popular belief, we don't enjoy that.

When you bring in a console to trade in that came out 8 years ago and is missing parts, you have to understand why we make you buy the replacements. Would you want to buy a 360 without a controller for full price? No? That's what I thought.

Whenever a customer wants to complain about a trade value I just have to explain to them that they are more than welcome to go somewhere else. Though I would love your business, I would much rather you leave happy.

Another thing that people don't realize, GameStop wholeheartedly believes in saving customers as much money as possible, and keeping their real money in their pockets.

Complaining to an employee because you're DS Lite isn't worth much, or if we have to reduce a value because of missing parts is beyond pointless and only makes our jobs more frustrating. I promise you the minimum wage employee you're causing a scene to doesn't care that you don't understand our process. That doesn't mean we don't value your business, we just can't do anything to change it.